As economic slowdown hits, investors must reposition for resilience: Analyst

The insurance sector, industrial real estate and specialty retailers are showing promising signs for investors, as a host of other industries begin to feel the grind of a stuttering economy, argues MLC Asset Management analyst Anthony Golowenko.

Golowenko, a portfolio manager at MLC, sees cracks beginning to appear in household budgets, with scant respite for householders already under strain from cost-of-living and mortgage rate pressures.

Businesses, ultimately, will soon feel the pinch of consumers tightening their purse strings.

Consumers, he adds, will struggle to bear further price rises, with early signs that businesses are realigning themselves for a predicted economic slowdown.

“For the first time in seemingly a long time, we’re alert to private sector organisational restructuring, realignment and ultimately staff cuts this coming reporting season,” Golowenko said, increasing the weight on “domestic weakness and economic slowdown scenarios.

“Coupled with elevated starting valuations on earnings seemingly yet to be delivered… we expect there’s going to be some twists n’ turns and likely big dips should these underlying earnings fail to materialise,” he added.

However, there are still strong prospects for investors, including the “still-out-of-favour” A-REITs, with “expanding return-to-the-office work practices and narrowing of bid-ask spread for commercial property transactions”.

As headwinds hit the economy, Golowenko urges for a stronger focus on resilience, zeroing in on “quality businesses” – those with “focused management teams, delivering solid earnings, and maintaining, ideally, expanding margins”.

In an otherwise challenged earnings environment, Golowenko sees the growing appeal of three sectors: insurers, industry and industrial and specialty real estate, and specialty retail.

On insurers, he sees resilience in the earnings of both general and health insurers, driven by premium increases and improved investment earnings from still elevated yields. In the health insurance space, cost-of-living pressures are favourably impacting the rate of extras claims.

In the domestic REITs space, Golowenko sees manifold opportunities, including in “last-mile urban infill locations”, as demand for urban housing increases, modern logistics and data centres, capitalising on the data economy, and with increasing housing affordability challenges self-storage and (well located, high amenity) land lease.

Taking advantage of still well-heeled ‘baby boomer’ and elder Gen X consumers (“businesses catering to over-50s and/or low- or no-mortgage households”), specialty retailers will also likely remain resilient, with Golowenko in particular citing the continuing success of luxury wine merchant ASX-listed Treasury Wines.

Four stocks to look out for

Golowenko flagged four stocks to watch for in the upcoming reporting season.

Listed furniture retailer Nick Scali may be able to capitalise on the unevenness of the cost-of-living crunch, with established homeowners and downsizers continuing to spend big on home improvements.

“We see Nick Scali as an incredibly well-run business, with recent ‘runs on the board’ in successfully integrating the Plush business and demonstrably lifting margins.”

Media, construction and mining conglomerate Seven Group Holdings, which recently assumed a full ownership stake in Boral, now boasts ‘big three’ business units – WesTrac, Coates, and Boral – placing it in an enviable position as a modern-day equivalent of the ‘picks n’ shovels’ play, Golowenko said.

Logistics equipment giant Brambles, which specialises in pallet-making, will see the benefits of “easing pallet intensity and lumber prices, coupled with improved efficiency and optimisation processes”, placing the business in a solid position to do ‘more with less’. This will continue to drive margins in the absence of outright volume growth.

Commercial and industrial property company Goodman Group will likely reap the rewards of continuing boon in artificial intelligence – a collective ‘AI mania’ – with demand for data centre sites and access to secured power growing significantly.

Golowenko wrote: “Consistent execution on the development program, steady property income growth, typically conservative earnings outlook, and more recently the step-up in ‘highest and best use’ development potential to encompass data centres have underpinned [Goodman’s] now hulking A-REIT representation.”